As much as 40% of overall fresh produce (fruits and vegetables) production is discarded. Middlemen in the supply chain receive much of the blame for this high level of waste. However, research carried out over the past five years or so suggests that this view is incorrect.
Based on initial work completed by the author and a team at the Malaysia Institute for Supply Chain Innovation (MISI), the preliminary finding warrants further research.
Fresh produce is moved hundreds if not thousands of miles before reaching the consumer’s table. During this journey, the fruits and vegetables are traded, graded, inspected, and packaged several times. The surviving product is subject to a final weeding out process by consumers at the point of sale.
There are about a dozen middlemen in the fresh produce supply chain who, according to most researchers and consultants, are one of the main sources of waste because they make a minimal contribution to operational efficiency while taking the largest share of the profits. As a result, it is argued that profit margins for farmers and other stakeholders are reduced.
There is an expectation that modern food retailers will introduce advanced technology and infrastructure that will eventually eliminate the intermediary role. The underlying assumption is that large retail organizations have the experience, resources, and product volumes to do a much better job at providing the operational support that middlemen supposedly offer.
However, changing the supply chain in this way appears to be easier said than done. Several initiatives to eliminate intermediaries from the supply chain have failed miserably.
In light of these failures, what do middlemen add to the fresh produce supply chain that large organizations are unable to replicate?
To answer this question, the research focused on the rural areas and wholesale markets of Uttar Pradesh, Bihar, West Bengal and New Delhi in India. The work involved engaging in detailed discussions with middlemen at different levels of the fresh produce supply chain.
These parties included wholesalers at the village, local market, district, state, and national levels, and village collectors (local agents, usually farmers, who buy fruit and vegetables from other growers and sell the produce in auction markets). These entrepreneurs fulfilled various operational roles in the fresh produce supply chain such as consolidator, grader, inspection agent, transporter, and storage provider.
It became apparent that middlemen contribute more to the supply chain than is often described in research papers and consultancy reports.
For example, in general the region’s farmers lack the cash as well as the motivation and resources to optimize their yields. They prefer to receive their money as soon as the auction for their produce comes to an end. Once auctioned, the ownership of the produce transfers to middlemen, who generally play a dual role as commission agents and wholesalers. The wholesaler is responsible for selling the produce to retailers in the local market (wet market), or to transport it to larger wholesale markets with an expectation of higher returns. However, by paying the farmer in advance, there is a risk that the wholesaler might not find profitable buyers. It transpired from various research efforts that this is indeed the case: in most instances, the wholesalers made a loss. Thus, one of the reasons for higher margins is the risk involved and the losses incurred by wholesalers during the selling cycle.
Farmers also rely on intermediaries for financial help to meet a wide range of needs including the purchase of supplies, to pay expenses related to various activities, and to cover emergency situations. Farmers are unattractive customers to most financing institutions and government agencies due to a lack of collateral, the absence of a fixed source of income, and scant documentation. Moreover, small land holders do not wield much political capital. Middlemen fill these funding gaps, even with the knowledge that a high percentage of their farmer customers default on loans. To mitigate the risk, they charge farmers high interest rates.
An obvious question is whether farmers who enter into loan agreements are obliged to sell their produce to middlemen who provide the loans. It was confirmed by both parties that there is no enforceable commitment of this type. Farmers might offer their produce to these sources of finance as a courtesy, but there is no formal obligation.
The research also shed light on the wholesaler’s relationship with retailers. Again, an early observation is that the wholesalers have an important role to play.
Small retailers rely on the turnover of a small amount of produce for their income. Unlike giant retailers in the west, these hand-to-mouth storeowners/ hawkers are largely dependent on the credit made available by wholesalers. They attend the auction market to buy produce, but due to a lack of cash are unable to buy directly from the farmers who want immediate payment. Thus, the role of middlemen is to conduct an auction to derive a mutually agreed price, and then pay the farmers cash and give the produce to the retailer on credit with a one-day limit. This is another risk that middlemen take on. In most cases, retailers are either unable to return the cash within the same day or even at all.
Middlemen have to bear the losses, and there are only a limited number of ways to recover their investments. Moreover, these intermediaries have to continue taking the risk in order to keep the business going, assuming a certain percentage of default.
The middlemen can decide to sell the produce in other markets that promise higher returns. In such cases, they take on the additional risk of underwriting the transportation of the produce, as well as the costs of loading and packaging. Here too, they might fail to secure higher prices for their wares and suffer losses through the wastage of produce while in transit. Again, in an effort to offset these risks, wholesalers charge a high margin to farmers.
Can it be concluded from these findings that middlemen not only play a key role in the fresh produce supply chain, but also execute this role efficiently? Not necessarily. While they are a critical component of this supply chain in India, intermediaries are also a source of inefficiency. Moreover, in addition to a lack of trust between trading partners, the supply chain is impaired by communications gaps and poor infrastructure. These problems generate a huge amount of waste that inflates unit prices for storage and transportation.
Reforms are needed, but at the system rather than functional level. The changes should be holistic in order to achieve sustainable improvements for farmers, retailers, and wholesalers. Further, instead of developing new systems, it would be better to improve existing practices by educating the middlemen and better aligning market returns across the supply chain.
This article was written by Dr. Manish Shukla, Postdoctoral Research Associate, MISI. For further information, contact the author at email@example.com.